India: big promises, Modi-fied expectations

The Narendra Modi-led National Democratic Alliance swept to power last year with a landslide victory and a flurry of ambitious promises

Dharmakirti Joshi

A year ago, Narendra Modi took on the top job in India, pledging that “ten years is all that is needed” to modernise India. The 64-year old Indian Prime Minister vowed to build 19 km of new roads every day up to, provide vocational training for 500 million people by and revitalise India’s fragile economy. And that was just for starters.

A year later, a slew of measures has boosted macros, tempered inflation and inched forward growth as we have described in our new report Modified Expectations. But speculation about a speedy economic turnaround and big-bang reforms is getting a deserved reality check; expectations are being modified on the back of rising crude oil prices, the prospect of a weak monsoon and a parliamentary deadlock over legislation for land acquisition and Goods & Services Tax. The government is realising that sometimes miracles take a little longer.

In the government’s favour, are the measures it has taken to energise bureaucracy, fast-track decision-making and ease doing business; all these will create enablers for growth. Nevertheless, they can’t push up demand in the short term. Nor is there a monetary bazooka at hand to engineer any quick revival.

There’s no doubt that the high fiscal deficit, inflation and frail economy the government inherited have been holding it back. Monetary policy has only recently turned favourable and few banks have passed on the small reduction in interest rates (the Reserve Bank of India has cut interest rates by 50 basis points so far to 7.5%). Monetary stimulus simply isn’t there.

WHAT HAS WORKED?

Slow progress is, however, being made. GDP growth has increased to 7.4% this year from 6.9% in fiscal, while inflation has dropped to 6% from 9.5%. It looks like moves to improve transparency and the efficiency of the goods and labor markets, as well as financial sector reforms will result in medium-term growth. What’s more, the government has cleared infrastructure bottlenecks, speeded up decision-making, cut red tape and sorted out mining issues.

And restraint in increasing minimum support prices and the release of food grain stocks into the market have helped keep food inflation under control. As a result, tender shoots of growth are already emerging and credit ratio, business and consumer confidence are looking up.

The bad news is the fact that the government has so far failed to revive manufacturing or address rural distress. Meanwhile, lack of demand is holding back private-sector investments. And crucially, little has been done to improve health or primary education.

WHAT SHOULD WE EXPECT?

So what lies ahead for India and its population of near 1.3 billion? We expect consumption to lead the investment cycle, while lower food and fuel inflation and a reduction in interest rates should support private consumption. With a gradual pick-up in consumption demand and public investment in select infrastructure sectors, private investment activity should revive by.

Speculation about an economic turnaround and big-bang reforms is getting a reality check According to our forecasts, India’s GDP growth will touch 7.9% in fiscal, up from an estimated 7.4% in, triggered by increased private consumption and a pick-up in public sector-led infrastructure projects. Of course, one vagary remains: the monsoon. A sub-normal monsoon could depress rural demand and delay consumption-led recovery.

There’s room for some optimism, however. The Modi government has identified the major issues and put the right building blocks in place. But it needs to do a lot more to deliver on its original promises. The good thing is, the government seems determined to do the hard yards than go for populist solutions. That should augur well.

India: big promises, Modi-fied expectations

The Narendra Modi-led National Democratic Alliance swept to power last year with a landslide victory and a flurry of ambitious promises

Dharmakirti Joshi

India: big promises, Modi-fied expectations

The Narendra Modi-led National Democratic Alliance swept to power last year with a landslide victory and a flurry of ambitious promises

Dharmakirti Joshi

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